Thursday, May 27, 2010

When a package of movies is licensed, a frequent issue is how to allocate the license fee among the pictures in the package. If all the pictures are of the same commercial worth, a simple division among the films would appear to be fair. But movies are not fungible commodities like jelly beans, and their value can vary greatly. Moreover, the worth of a movie can be subjective.

Producer Alan Ladd claimed that Warner Brothers undervalued and underpaid the license fees attributable to Blade Runner, Body Heat, Night Shift, Tequila Sunrise, Outland, Chariots of Fire, and the Police Academy franchise, consisting of the original and sequels 2, 3, 4, 5 and 6. Ladd was entitled to profit participation from the films.

Warner licensed packages of movies to broadcast television and cable networks. In a practice known as "straight-lining," Warner allocated the same share of the licensing fee to every movie in a package, regardless of its value to the licensee. The gravamen of Ladd's action against Warner is that by allocating the same portion of the licensing fee to every movie in a package without regard to the true value of each movie, Warner deprived Ladd of a fair allocation of the licensing fees to which Ladd was entitled as a profit participant. The complaint included causes of action for breach of contract, breach of the implied covenant of good faith and fair dealing, fraud and negligent misrepresentation.

Ladd's expert testified that in treating every movie as though it had the same value, "the studio was not doing its expert work, as a provider or distributor of content, in weighing the value of each of these titles." Ladd was entitled to 5 percent of gross revenues on all films once Warner recouped its costs, except for Chariots of Fire, on which he was entitled to 2.5 percent. Thus, on the $97 million in under allocated licensing fees, Ladd's profit participation should have been $3,190,625.

In its opinion the California Court of Appeals held that Warner owed a duty to allocate license fees fairly to Ladd's movies. It mentioned that every contract in California contains an implied covenant of good faith and fair dealing that "neither party will do anything which will injure the right of the other to receive the benefits of the agreement." (Kransco v. American Empire Surplus Lines Ins. Co. (2000) 23 Cal.4th 390, 400.) The implied covenant "finds particular application in situations where one party is invested with a discretionary power affecting the rights of another. Such power must be exercised in good faith." (Carma Developers (Cal.), Inc. v. Marathon Development California, Inc. (1992) 2 Cal.4th 342, 372.)

In evaluating its movies, Warner internally assigned each movie a grade of A, B or C. All of Ladd's films were rated either A or B. The problem was that Warner allocated the same proportion of the license fee to each title in the package, irrespective of the letter grade.

The court noted that movies rated C were filler material, which is why they are bundled in a package together with A and B movies. Leslie Cohen, director of film acquisitions at HBO, testified that in one licensing deal, Warner added a group of old Tarzan movies to a licensing package at no cost. Warner then allocated a license fee of $40,000 to each of the Tarzan movies, thereby reducing other movies' allocations in the package.

Ladd's expert also testified that in non-straight lined film packages, movies that were less valuable than Ladd's received greater value. For example, there were times when Daffy Duck and Bugs Bunny animated films were allocated double the money that was allocated to Chariots of Fire, a valuable feature film which won multiple Academy Awards, including Best Picture. Those animated films were wholly owned by Warner, which means Warner kept every dollar generated by licensing fees on those films. Ladd's expert determined that Warner was over allocating license fees to movies that were studio owned or that did not have profit participants.

Warner Bros had appealed a judgment on a jury verdict awarding plaintiffs $3,190,625 in damages. Most aspects of the judgment were affirmed and Ladd was granted recovery of costs on the appeal. Ladd v. Warner Bros. Entertainment, Inc. B204015. Court of Appeals of California, Second District, Division Three. Filed May 25, 2010.

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About Me

A veteran entertainment lawyer, arbitrator, expert witness and author, Mark Litwak has provided legal services or acted as a producer rep on more than 100 feature films. He is the author of 6 books including: Reel Power, Dealmaking in the Film and Television Industry (winner of the 1995 Kraszna-Krausz Book Award), Contracts for the Film and Television Industry, and Risky Business: Financing and Distributing Independent Film. He is also the author of the popular CD-ROM Movie Magic Contracts.
As a law professor, he currently teaches at the U.S.C. School of Law, and has previously taught at the Univ. of Puget Sound and Loyola Law Schools. He has been on the faculty at UCLA for 24 years. He has lectured for the American, California and Texas bar associations. A frequent speaker, he has lectured at many universities including Harvard, the American Film Institute, Columbia University and NYU. He has also presented movie industry seminars in England, Australia, South Africa and Canada.
Mark Litwak is AV®
Peer Review Rated by Martindale-Hubble and has been named a Superlawyer multiple times by the publishers of Law and Politics Magazine.